If I sell my investment property, how much capital gains tax (CGT) will I pay? 

Guest post – Paul Whitelaw, RFE Group

There has been a significant rise in residential property prices in recent years, largely due to record low interest rates. Many people have purchased an investment property, sometimes more than one, which has, for the most part, been a successful wealth creation strategy.

Despite the Reserve Bank keeping interest rates on hold since August 2016, the banks have started increasing interest rates this year. This has led to a decline in housing market confidence in Australia. One recent headline in the SMH (11/10/18) read “Australia’s property downturn will be the largest since the 1980s, says Morgan Stanley.”

It’s hardly surprising then, that many people are asking themselves, ‘Should we sell our investment property?’ Unfortunately, far less people are asking the related question ‘If we sell our investment property, how much capital gains tax will we pay?; Or they ask it too late, usually when they see their accountant to do their tax return.

I’m no property expert, but I do know about CGT and this article will show you how to perform a simple calculation so you can know, preferably before you sell, how much CGT you might end up paying, and when.

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But first, you need to track down the following information:

  1. The date you purchased the property. This needs to be the date of the contract and is typically the date of exchange of contracts, not the settlement date. This can be particularly important if the dates are in different financial years.
  2. The cost of the property. You need to include the purchase price of the property and the acquisition costs ie. stamp duty and legal/conveyancing fees.
  3. The current property value, as well as an estimate of the selling costs – property agents commission, and also legal/conveyancing fees.

There’s one final piece to the puzzle. The capital gain you make on an investment property is calculated under special rules, with the taxable capital gain included in your taxable income, which is taxed at your marginal rate of tax.

There is no separate ‘tax’. So, to work out the CGT, you need to estimate your taxable income for the year from all other sources, including the rental income/losses on the property itself.

If you have all that information, then the hardest part is over.

The marginal tax rates for adult Australian residents, for the 2018/19 tax year, are:

Source: ATO

Note that different rates apply to those under the age of 18, and also to non-residents of Australia, so if these are your circumstances, you will need to apply the different rates.

Now for some assumptions:

For illustrative purposes, I will assume the following for each of the 3 typical scenarios which follow:

Current value of property (after selling costs) $1,100,0000
Original cost of property (including acquisition costs) $700,000
Nominal capital gain $400,000
Net rental income this financial year $5,000
Scenario 1:

Jamie is an IT consultant in his late 20s, earning $250,000 per year. He also considers himself a property speculator, and purchased his investment property in Sydney 10 months ago, with the intention of selling within 12 months. He now wants to sell.

As Jamie is already on the highest marginal rate of tax, the CGT on the property will be 47% x $400,000.

Nominal capital gain $400,000
CGT liability $188,000
Effective tax rate 47%

Scenario 2:

Bill and Jenny are married, and have a 6-month-old baby. Bill is an HR Manager, earning $150,000 per year, and Jenny doesn’t work. They purchased an investment property in Melbourne 5 years ago, in joint names, when they were both working.  Now, with a young family and only 1 wage, money is getting a bit tight, and they would like to sell.

As Bill and Jenny have held the property for more than 12 months, they can discount the nominal capital gain by 50%. As the property is held jointly, it needs to be evenly split between Bill and Jenny.

Nominal capital gain $400,000
Less 50% discount ($200,000)
Taxable capital gain (combined) $200,000
Taxable capital gain for Bill and Jenny (each) $100,000
Bill’s tax position

After selling the property, Bill’s taxable income will be $252,500, and his tax liability will be $54,097 + [45% x ($252,500 – $180,000)] + 2% x $252,500 = $91,772

Jenny’s tax position

After selling the property, Jenny’s taxable income will be $102,500, and her tax liability will be $20,797 + [37% x ($102,500 – $90,000)] + 2% x $102,500 = $27,472

Combined tax position

Their combined tax liability will be $91,772 + $27,472 = $119,244

If they didn’t sell

Bill’s taxable income would be $152,500, Jenny’s $2,500. Bill’s tax liability would be $46,972, and Jenny’s $nil.

The difference in the combined tax liabilities is $119,244 – $46,972 = $72,272.

Nominal capital gain $400,000
Combined CGT liability $72,272
Effective tax rate 18%

Scenario 3:

Tom and Betty are both over 65 and retired.  They are withdrawing money (tax free) from their superannuation income stream accounts.  They are concerned about the direction of the property market, and would like to sell their investment property in Wollongong NSW, which they purchased 10 years ago.  They have no other investments, and no taxable income apart from the net income from the property.

Tom and Betty’s tax position

After selling the property, Tom and Betty’s taxable income will be $102,500 each.  Their tax liability will be $20,797 + [37% x ($102,500 – $90,000)] + 2% x $102,500 = $27,472 each.  The combined tax liability will be 2 x $27,472 = $54,944.

If they didn’t sell the property, they wouldn’t pay any income tax.

Nominal capital gain $400,000
Combined CGT liability $54,944
Effective tax rate 14%

Tips and traps

If you sell now, you should receive the proceeds before Christmas, under a standard 6 week settlement period.  However, you may not need to pay the tax until you lodge your income tax returns which could be as late as May 2020 if you use a tax agent. That’s 18 months away.  It is a good idea to set aside the capital gains tax amount you calculated in a separate, high interest earning bank account so that you know you will have the cash available to pay the tax.

A common trap is that people sell a property and use the entire proceeds to buy another property, or reduce their borrowings without any capacity to refinance.  18 months later, they simply don’t have the cash available to pay the tax, and additional refinance costs, and/or tax penalties can apply.

A final word

Speak to your accountant or tax agent for further tax information and advice, especially if you have ever lived in your property, as additional tax concessions may apply.

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Paul Whitelaw
Paul Whitelaw
Senior Financial Advisor at RFE Group | 1300 071 107 | [email protected]

Paul Whitelaw is the Senior Financial Advisor at Retirement Services Australia (RFA) Group, a financial services group in Parramatta, New South Wales. He is an experienced financial advisor skilled in retirement planning, investment and wealth creation, superannuation, insurance and estate planning. Paul has worked for RFA since 2018. Before that, he was a Certified Financial Planner with Blue Chip Super and with Beacon Wealth Solutions.